Sales Tax Reform is Coming

jacob-hilton-228976On Saturday, the list of states where Amazon collects and remits sales tax on purchases grew to 46, including the District of Columbia. Even though technically that means they added only the states of Hawaii, Idaho, Maine and New Mexico to the roster, this is a watershed moment for sales and use tax reform. Amazon now collects sales tax in ALL states that require it (only the “NOMAD” states of New Hampshire, Oregon, Montana, Alaska, and Delaware have no state-wide sales tax requirement). This is a significant symbolic change that will tilt the scales towards sales tax reform.

Amazon’s gradual policy change

Ever since the Quill decision of 1992, states have had a difficult time compelling out-of-state and online sellers to register for sales tax in their states. In fact, Amazon would battle states and refuse to register for sales tax under the cover of the Supreme Court’s ruling in Quill, which said that states can not require sellers to remit sales taxes if they do not have a physical presence (“substantial nexus”) in the state. Amazon could only do this, however, in states where they did not own a warehouse or an office.

Starting in about 2012, Amazon began changing their philosophy around sales tax. Recognizing that consumer behavior was shifting around delivery expectations, Amazon began building warehouses around the country to enable faster delivery. To do this though, they were forced to negotiate with the states where they wanted to build warehouses, including an agreement to start collecting and remitting sales taxes. Since 2012, consumer expectations have continued to shift, and Amazon has moved in lockstep to meet demand with increasingly fast and convenient delivery options. Accordingly, and especially over the last year, Amazon rapidly relented to the remaining states where they weren’t collecting sales tax.

States target Amazon’s competitors

Now that Amazon is collecting sales tax in all states that require it, the pressure is on Amazon’s competitors as states look to compel out-of-state sellers to register and remit sales taxes. Because the states are hamstrung by Quill, and Congress has yet to push a federal sales tax bill over the finish line, states are increasingly inventing creative ways to circumvent Quill. Forcing sellers to register and remit is far more effective than collecting use tax individually from in-state residents.

Colorado found an interesting way to work around Quill by requiring out-of-state sellers to report their transactions to the Department of Revenue if they don’t register for sales tax. In other words, if out-of-state sellers choose not to voluntarily register to collect sales tax in Colorado, they are forced to rat out their customers so the state can collect use taxes from them. This scheme, originally enacted in 2010, was upheld as constitutional recently following multiple years of constitutional challenges by Direct Marketing Association, resulting in multiple states looking to replicate Colorado’s model. Colorado will start enforcing this law on July 1st.

If Congress does not act, the Supreme Court will

Many other states are in the process of pushing the limits of Quill with the explicit goal of reaching the US Supreme Court (SCOTUS). South Dakota, for example, enacted an “economic nexus” law that was designed to make it all the way to SCOTUS. An immediate challenge is currently on its way to the South Dakota Supreme Court. Indeed, if Congress fails to act, one if not multiple state laws will make its way to SCOTUS and sales tax reform could come from an opinion overturning Quill from the highest court in the nation.

Although Congress has many priorities that have been laid out in this important year for the new administration, sales tax may end up on the docket this year or next given the momentum from Amazon’s change coupled with the increased challenges states and courts are facing.  The only question is whether sales tax reform will come prior to a ruling by SCOTUS or following.

Several proposals have been floated over the last five years or so in Congress. The most successful attempt was the Marketplace Fairness Act (MFA) of 2013. MFA would perpetuate the current incredibly complicated destination-based sales tax scheme while giving states the teeth they need to enforce their local laws. Rep. Bob Goodlatte (R-VA), on the other hand, would like to move to an “origin-sourcing” scheme in an attempt to simplify the sales tax laws. Neither proposal is perfect, so hopefully Congress can compromise and create a bill that’s fair to both large and small sellers.

The route to reform is not perfectly clear yet, but one way or the other we’ll have a significantly different sales tax landscape over the next 1-2 years.

What this means for wineries

Wineries that ship products directly to consumers can currently ship to 45 states with the proper permits. Most of those states require the wineries to first register with the Departments of Revenue for sales tax remittance prior to obtaining their direct shipping permit. Yet some of those states still do not require sales tax registration. Minnesota, for example, currently does not require sales tax registration. The current flurry of activity and momentum towards sales tax reform will surely mean that wineries should prepare for the eventuality of having to register and remit sales taxes in all non-NOMAD states that allow direct shipments.

 

Jared Polis would like to tie Jeff Sessions’ hands on cannabis enforcement

c6242db3-df3a-42e4-91c4-d6e28f222d2dThe cannabis industry has felt tremendous amount of uncertainty ever since Jeff Sessions was nominated for Attorney General. Sessions’ multiple negative comments about cannabis, both in the past and over the last few months, have led to nonstop speculation as to what the Department of Justice (DoJ) will do to businesses in states that allow for the legal use of medical and/or recreational cannabis.

Jared Polis (D-Colorado), who is also a founding member of the Congressional Cannabis Caucus, would like to protect the industry from the whims of Sessions, and future Attorneys General, by removing the purse strings from the DoJ. According to the Denverite, Polis made comments last week announcing plans to attach an amendment to Congress’ annual spending bill to prevent DoJ from using any federal funds to go after businesses operating legally in states that have existing medical or recreational cannabis laws.

If we successfully attach it and it becomes law, no Attorney General — despite what they might want to do — would be able to use the funds that Congress gave them to crack down on activities that are legal under state law with regard to marijuana. – Jared Polis

The proposed amendment would be similar to the Rohrabacher-Farr amendment, from 2014, that prevents DoJ form using federal funds to interfere in the implementation of state medical  cannabis laws. The current extension of Rohrabacher-Farr is scheduled to expire next month on April 28th. Rohrabacher-Farr does not prevent DoJ from spending on the enforcement of any recreational laws. Presumably, Polis’ new amendment would fix that loophole.

Our Take: Because cannabis remains illegal on the list of “Schedule 1” drugs on the Controlled Substances Act (CSA), state laws are in conflict with federal laws. The Obama administration issued the “Cole Memo“, which provided guidance to all US attorneys regarding enforcement of cannabis laws and allowed states to implement their existing laws. However, Sessions is not bound by that memo and has not offered any guidance other than to hint that he is OK with medical cannabis laws.

Until Congress actually takes action to deschedule cannabis from the CSA, this is probably the next-best alternative. Preventing spending does tie the hands of DoJ and allows the state experiments to continue, even while the manufacture and sale of cannabis remain illegal under federal law.

What Michigan tells us about the future of DtC wine shipping

I had the pleasure of writing a guest post at Hinman and Carmichael’s Booze Rules blog called Michigan: Canary in the DtC Coal Mine? I hope you can check it out and let me know your thoughts.

To me, the timeline that I outlined at the top of the piece was a very interesting confluence of events. The fact that Michigan got sued for a third time on DtC legislation is pretty fascinating on it’s own. However what’s really interesting to me is that the events in Michigan followed almost exactly the events that occurred shortly before in Illinois.

Illinois wholesalers had taken matters into their own hands, and then forced more involvement by the Illinois Liquor Control Commission. That was followed by much more restrictive legislation (including potential felony penalties), which led to a lawsuit against the state. Sound familiar?

So, is this a pattern? Should we expect similar events to play out in additional states? It seems like it. As we speak, Minnesota is considering similarly restrictive legislation. Wineries, retailers, third party providers, and fulfillment houses that operate in the DtC wine world should be sure to stay on top of all of these changes and step up their compliance game.

In Michigan, the legislation seemed to be enabled significantly by the “Wine Direct Shipping Research and Analysis” report out out by the Michigan wholesalers. I’d like to take a closer look at this report in a future post. Some of the methodology, assumptions, and conclusions in the report need a closer review in my opinion.

Check out the piece and let me know what you think!

 

 

 

Tidbits from TTB’s Annual Report

I’m not sure if I’ve actually read the Alcohol and Tobacco Tax and Trade Bureau’s (TTB) Annual Report cover to cover before. It’s actually quite good and informative. Here’s a few things I learned from reading the 2016 report.

  • Screen Shot 2017-03-15 at 9.23.37 AMTTB’s vision is to “be the world’s authority in the regulation, taxation, and science of alcohol and tobacco products and a model for next generation government”
  • TTB has three strategic goals: Collect the Revenue, Protect the Public, and Management and Organizational Excellence
  • There are 82,391 total permittees, 97% of which are from the alcohol industry, however only a subset (12,941 in FY 2016) pay taxes in a given fiscal year.
  • $22.1 Billion in revenue was collected in FY 2016, on a total budget of only $106 Million
  • 161,477 Certificate of Label Approval Applications (COLAs) were received in FY 2016. That is a massive number!
  • Tobacco tax collections are trending downward (12% since 2012), but still amounted to $13.3 billion in FY 2016, representing 60% of all TTB tax collections
  • Tax collections in Virginia and North Carolina exceed $5 Billion each. California and Kentucky are north of $1 Billion each. In Mississippi, North Dakota, and Wyoming, tax collections are each less than $1 Million.
  • In FY 2016, TTB processed approximately 8,000 applications for a federal permit
  • California boasts 7,254 alcohol permit holders, far exceeding the next state of Washington (1,911)
  • Wine products represented roughly 72% of all COLA applications in FY 2016, followed by malt beverage (18%) and distilled spirits (9%)
  • Distilled spirits represented 48% of the 11,452 formula applications, followed by wine (32%) and malt beverages (20%)

 

How to report your Colorado consumer use tax from Amazon

Below I’ll walk you through a step by step guide for how to figure out (hack) how much use tax you (as an individual) should be paying to Colorado. But first, here’s just a little background, without getting too far into the weeds, on why you have to do this in the first place!

Even though I’ve been living in Colorado for almost twenty years, and worked the last 12 in the compliance and tax industries, it didn’t become clear to me until a few years ago that I should be paying “consumer use tax” on purchases I made online. In the Direct Marketing Association v Brohl decision from the 10th Circuit, the introduction provides a pretty good explanation for this, and also acknowledges that very few people actually pay this tax.

When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue (“Department”). When Barnes & Noble sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book over the Internet to a Colorado buyer, it has no obligation to collect sales tax. This situation is largely the product of the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which held that, under the dormant Commerce Clause doctrine, a state may not require a retailer having no physical presence in that state—e.g., Amazon as opposed to Barnes & Noble—to collect and remit sales tax on the sales it makes there.

Faced with Quill, many states, including Colorado, rely on purchasers themselves to calculate and pay a use tax on their purchases from out-of-state retailers that do not collect sales tax. But few in Colorado or elsewhere pay the use tax despite their legal obligation to do so.

To get around the fact that they can’t compel out of state businesses to collect and remit sales tax on sales that originated out-of-state as well as that very few Colorado residents actually collect tax, Colorado passed a law, which has recently been upheld as constitutional, that requires sellers to report their sales data to the Colorado Department of Revenue (DOR). In effect, this law forces sellers that choose not to register with the DOR to rat out their own customers, making it much easier for DOR to then go after Colorado residents for not paying use tax. Because of this, I started paying consumer use tax on my purchases for the past few years.

Almost all of my purchases from out of state sellers are on Amazon, so I’m going to focus on Amazon in this guide, but the same principles can be used for any other sellers. This process can obviously also be used for other states that require consumer use tax. Note, this is not a perfect process, and circumstances vary, but it should give you a general sense of how to make the calculations.

Step by Step Guide for Paying Consumer Use Tax in Colorado for Amazon Purchases

  1. Go to Your Account -> Your Orders -> Order History ReportsScreen Shot 2017-03-10 at 10.51.05 AM
  2. Set “Report Type” to “Orders and shipments”, select the “Last Year” quick set option to filter on just your shipments from last tax year. Type in a name for your report (like “2016 Tax  Report”) so you can easily access it in your account if you ever need to come back to it. Click “Request Report” to run the report.
  3. Amazon will then provide a .csv file that you can them open with Google Sheets (which I use) or Microsoft Excel.
  4. Filter on Column L (Shipping Address State) to show only the shipments that were shipped to you in Colorado. You don’t want to include gifts or other shipments you sent to other states.
  5. Filter on Column T (Tax Charged) to show only purchases where no tax was charged. Depending on the seller, sales tax may or may not be collected on each transaction. You want to pay only on the transactions where sales tax was not collected.
  6. Sum the values in Column U (Total Charged) to determine the value of transactions for which you need to pay consumers use tax.Screen Shot 2017-03-10 at 11.34.26 AM
  7. Complete or use as a guide form DR 0104US, which will ask you to multiply by the state consumer use tax rate of 2.9% as well as the rates from any special districts. Note: to determine if you live in a special district, use this handy online lookup tool.
  8. Report the number from box 7 of the DR 0104US on Line 14 of your Colorado Individual Income Tax form 104.

Whew! Not exactly easy. If you have a better way, I’d love to hear it!

H.R.1227 – Ending Federal Marijuana Prohibition Act of 2017 Introduced

Determined to eliminate the uncertainty created by Jeff Sessions and the White House, Rep. Thomas Garrett introduced H.R. 1227 (the Ending Federal Marijuana Prohibition Act of 2017) in the House of Representatives last week. The bill very simply removes (not reschedules) “marihuana” and “tetrahydrocannabinols” from the list of Schedule 1 controlled substances in the Controlled Substances Act (CSA). It also adds some language to the CSA that gives states the ability to prohibit the sale of marijuana into and out of their respective states.

Our Take: I doubt this will move any time soon and the chances are low of ending prohibition in this Congress. Only 3 Members have signed on as co-sponsors of the bill so far, although its still pretty early. The Congressional Cannabis Caucus hasn’t officially weighed in, but Jared Polis is signed on as one of the co-sponsors.

If the Department of Justice begins to take significant action against businesses in states that have existing cannabis laws, the list of co-sponsors will grow along with the momentum for actually ending prohibition. However, it’s highly unlike that we’ll see major movement on this bill in the next 12 months .

California ABC issues $400,000 settlement against beer wholesalers

The California ABC issued a press release stating that they had issued on of the biggest penalties in the history of the ABC. Primarily levied against Anheuser-Busch, LLC’s distributorships, the settlement is for prohibited marketing practices. The distributors are accused of providing “things of value” to retailers, thus creating an unfair marketplace. The year-long investigation in this case begun back in 2015.

Our Take: Some of the infractions seem minor here, but many ABCs around the country take “Tied House” laws very seriously and won’t stand for any things of value to be provided. It’s a bit surprising to see the California ABC issue such a major settlement, akin to what has become standard fines from the New York SLA. California is clearly sending a message to the rest of the industry here.